Assessing the Performance of Active and Passive Trading On the Ghana Stock Exchange

Abstract:

This paper sought to test the weak-form market efficiency of the Ghana Stock Exchange and to establish whether the application of technical trading rules like the Variable Moving Average (VMA) on the Composite Index (CI) would be profitable during the periods January 2011 to December 2014. The study also provides evidence that active trading on the GSE can be profitable and can outperform the buy-hold-strategy adopted by a passive trader or investor. To establish market efficiency, the random walk model is estimated using two different statistical methods, namely, the Augmented Dickey Fuller (ADF) Unit root test and the Lo & MacKinlay variance ratio test. Empirical results from the ADF unit root test and the Variance ratio test strongly reject the random walk hypothesis and evidently support previous empirical studies that the, Ghana Stock Exchange market is weak-form inefficient. To exploit the inefficiencies on the exchange, the study applied technical trading techniques called the Variable Moving Average (VMA). Five different variations of this rule i.e. (1, 50), (5, 50), (1, 150), (5, 150) and (2, 200) were applied to the index to investigate whether they would outperform the passive investment strategy. It was found that indeed the application of the VMA yielded positive returns and that out of the five combination of rules tested, four actually outperformed the results of a buy-and-hold strategy with the exception of the (2,200) rule. It was also found that employing technical rules with much shorter lengths yielded profits twice as much as the returns generated by a passive trader or investor who uses a buy-and-hold strategy.